Push to lock Nine’s hedge fund owners into holding stock

Nine chief executive David Gyngell flew to the US this week on an investor roadshow.
Photo: Peter Braig

by
Jake Mitchell

Leading fund managers say
Nine Entertainment Co
’s hedge fund owners should keep a significant stake in the media company if it goes ahead with $3 billion float plans, arguing the hedge funds should also be made to hold on to the stock for at least a year.

Nine, which owns free-to-air, digital and ticketing businesses, is tipped to list on the Australian Securities Exchange later this year. The Sydney-based ­company’s US hedge fund owners, OakTree Capital Management and Apollo Global Management, are expected to sell down at least part of their stake in any sharemarket listing.

Amid a growing pipeline of initial public offerings, there is debate in capital markets about how much vendors should retain in a float and whether that stake should be subject to an escrow period, preventing the sale stock for a certain period of time. “We’re believers in having sellers co-own these things," BT Investment Management head of equities strategy Crispin Murray told The Australian Financial Review.

“There’s obviously a lot of incentives for the sellers to create as optimistic an outlook as possible for the business being sold, and where these IPOs haven’t worked is because these numbers have not come through and they’ve squeezed everything they can to inflate profitability."

One of the criticisms of the troubled IPO of retailer
Myer Group
in 2009 was that its private equity owners, TPG and Blum Capital, did not retain a stake in the company and some of the financial forecasts used to sell the stock did not come to fruition. Myer shares were priced at $4.10 for the IPO but plunged to $3.88 on the first day of trade. The shares closed at $2.84 on Wednesday.

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Company Profile

Myer said in its prospectus it expected sales of $3.36 billion in financial 2010, which were actually reported at $3.32 billion a year later. The company exceeded its forecast for $160 million net profit but the broader cause for concern in the retail sector had been, and remains, a decline in sales.

It has been suggested that sellers of companies on public markets should not retain majority ownership because this creates a potential overhang effect where the company’s executives can be undermined by majority shareholders.

“Some talk about overhang issues but I tend to think that if the business is going well, the overhang won’t become an issue," Mr Murray said.

Logical to retain a holding

Ausbil Dexia head of equities
Paul Xiradis
said institutional investors generally preferred private equity to retain a material stake in a company when it was sold down, although overhang issues were also a concern.

“The market is always sceptical about buying businesses from private equity because they pretty it up for sale and the reported costs of the business may not be spread evenly over a period," Mr Xiradis said. “Myer would come to mind."

He said an escrow period was generally preferred where the owners would have to hold onto their stakes for certain period of time.

Mr Murray said it would be logical for Nine’s owners to retain a holding in the company for at least two half-yearly reporting seasons to ensure that the forward estimates provided in the prospectus were realistic.

“Generally speaking, a full year means the owners can’t jump out straight away and it gives the business a chance to deliver on its forecasts," Mr Murray said.

Fund managers said demand for Nine shares would depend on pricing. They said the business represented good exposure to a potential economic recovery but they expressed concern about costs at time when broadcasters were paying more for content such as sports rights. Nine chief executive
David Gyngell
flew to the US this week on an investor roadshow.

Equity Trustees chief investment officer George Boubouras said major initial public offerings of late could be broken down into three categories: semi-government or monopolistic assets, demergers, or private equity and hedge fund sell-downs.

“We’re OK with demergers and with pseudo-government or monopolistic assets, of course you’re lining up to be there because of the benefits," Mr Boubouras said. “But if you’re talking about a P/E or hedge fund group, you need a requirement that they have skin in the game for at least three years to align everyone’s interests.

Heightened degree of scepticism

“Over the past 10 or 20 years, private equity have shown that if they want to exit an asset they need to aligning themselves with the new owners."

Mr Boubouras said there were no inherent issues with private equity floats, provided they were conducted properly. “There is merit in this process but there is also merit in how you go about the process," he said.

“Unfortunately over the year private equity haven’t necessarily covered themselves in glory about how they’ve dealt with the public market," Mr Wilson said. “The industry as a whole has to build that confidence back-up and it will take time."

Mr Wilson said Nine was potentially “very interesting", contingent on the pricing of the shares.

“Television provides good leverage to play the economy, considering we think that after this weekend the economy picks up with the removal of political uncertainty, and longer term, we see the benefits of lower interest rates and a lower dollar," Mr Wilson said.